[cdn-nucl-l] Nuclear Power Worthy of Public Investment, Power Engineering

["Jerry Cuttler" <jerrycuttler@rogers.com>]

FYI
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http://pe.pennwellnet.com/Articles/Article_Display.cfm?Section=Articles&ARTICLE_ID=189173&VERSION_NUM=1&p=6

Nuclear Power Worthy of Public Investment

By: Andrew Paterson, Environmental Business International

There are significant difficulties in rejuvenating the U.S. nuclear power
industry. With an energy bill moving to the front burner in Congress,
however, a next wave of safe, reliable "Generation III" plants could be
brought on-line after 2010, just as more than 100,000 MW of less efficient
coal plants approach retirement age.

According to the American Nuclear Society and other sources, public opinion
polls have turned around on nuclear power, with 60-70% of the American
public favorably disposed toward the clean power provided by nuclear
reactors. As former FERC commissioner Branko Terzic put it at the Deloitte
Energy Conference recently, "Nuclear power offers reliable, high quality,
emission-free electricity at stable prices not dependent on weather, close
to loads with a small footprint - from a planning viewpoint, what's not to
like!"

Further, the Nuclear Regulatory Commission has renewed licenses on 16
reactors at eight sites in seven different states. The veracity of
anti-nuclear groups is frankly overestimated: many observers predicted
complicated license renewal of the current reactors with public opposition
and lawsuits. Fact is, that opposition never materialized. Another couple
dozen reactor sites are in the queue for renewal. Most communities near the
60 or so current sites support the high paying jobs, clean air and property
tax contributions to local schools and city services.

Favorable Factors

A number of major factors have swung around in favor of nuclear power since
the last wave of reactors were ordered in the late 1970s.

- Low Interest Rates: The sharp climb of interest rates in the late 1970s,
to above 15%, combined with licensing delays, caused more reactor
cancellations than any other factor. Rates are now near historical lows at
4-6%, enhancing the economics of nuclear units.

- High Capacity Factors: Last year the U.S. reactor fleet of 103 units
achieved a record 91% capacity factor (up from 60% in 1980) and generated
780 billion kWh, also a record, and a fifth of U.S. electricity. Smarter
management, operating experience and much shorter fuel outages account for
the gains. The fleet has consolidated in the last five years so that a dozen
companies now operate nearly 75% of U.S. reactors.

- Stable Fuel Prices: Compared to the wild gyrations in natural gas prices
since 2000, uranium fuel prices have been stable and low, below 0.5
cents/kWh net. Public commissioners and ratepayers like that, and the fuel
comes from stable allies Canada and Australia, not volatile governments in
the Middle East or elsewhere.

- Strong Local Support: According to the Nuclear Energy Institute (NEI), one
or two dozen reactors can be built at current sites (15,000-30,000 MWe). No
"greenfield" plants are needed, and the next reactors won't be built on Long
Island or in San Francisco. In fact, according to Ken Nemeth, Executive
Director of the Southern States Energy Board, public policy-makers in
several states, particularly in the Southeast, would openly favor
construction of new nuclear plants for the local benefits and the stability
they bring to regional electricity prices and supply, a welcome contrast to
the California electricity crisis in 2000.

- Advanced Plant Design and Experience: Instead of varying designs, the NRC
is now certifying a few reactor designs, and most importantly 3-D/4-D
computer-aided design and modeling is much advanced over what was available
25-30 years ago when the last reactors were ordered. Thousands more hours of
experience worldwide since 1980 also strengthen the design basis of new
reactors. U.S. firms are active in those projects.

- Emissions Benefits: While U.S. cities have made progress on lead, NOx and
SOx, further gains will be reversed unless new reactors are built. Without
new construction, electricity from nuclear power will decline from 20% today
to below 14% by 2020. Most of the gap will be filled by fossil sources. EIA
says that even with sharp growth in renewables, say from 3% to 6% by 2020,
wind, solar and biomass will barely offset the forecast decline in
hydropower; no new dams are being built either. In addition, nuclear units
are uniquely burning up 10,000 tons per year of uranium formerly used in
military warheads.

- "The Hydrogen Economy": Lastly, U.S. engineering firms also have an eye on
modular gas-cooled reactors. If successfully developed and built, these
higher-temperature "Generation IV" units could produce large volumes of
hydrogen thermo-chemically (using a sulfuric acid - iodide cycle). The
energy bill will likely carry provisions for DOE to build a first such
reactor. Geoff Ballard, founder of fuel cell maker Ballard Power and
chairman of General Hydrogen, stated at the World Nuclear Association
meeting in September that "High temperature nuclear units will form the core
of hydrogen production for 'hydricity' in this century. The other sources
don't begin to deliver the volume we will need to meet growing global
demand." Another wave of light water reactors need to be built now to get to
the hydrogen production reactors after 2020.

So Where Are the Orders?

Thirty reactors are now under construction worldwide (>26,000 MW), according
to the World Nuclear Association, but none in the U.S. The U.S. energy
sector is still absorbing 200,000 MWe of gas-fired plants built in the
merchant power boom since 1998. However, erratic and rising gas prices -
combined with massive equity devaluations and bankruptcies in merchant
energy - have cooled investor and utility interest in new build of anything.

In the Business Case for Nuclear Power completed in July 2002 by Scully
Capital for the U.S. Department of Energy (available at www.nuclear.gov),
the study's researchers discovered three "showstopper" risks via interviews
with industry executives and investors, any one of which would kill
prospects of a utility ordering a new plant:

1) Spent Fuel Disposal: Utility executives believe that opening the Yucca
Mountain disposal site in Nevada not only is essential for the current
fleet - as courts have already ruled - but Congress backing the licensing
and operation of the site makes a clear statement to the country about
political commitment to nuclear power. In July 2002, both houses of Congress
voted with better than 60% in favor to proceed with the licensing phase, and
Bush Administration then approved moving ahead led by Energy Secretary
Abraham.

2) Accident Indemnification: Congress will likely extend again the
"Price-Anderson" indemnification in the case of nuclear accident. The
indemnification only covers third party off-site claims, not losses suffered
by utility shareholders, and nuclear operators pay their own portion of the
insurance. The Three-Mile Island mishap in 1979 illustrates the point: the
containment building worked, no off-site damage occurred, and the business
loss of a reactor was borne by utility owners, not taxpayers.

3) Commissioning: The top risk cited by industry, investors and experts was
the "Shoreham risk", the prospect of pouring billions into construction of a
unit, only to have it stopped at the last minute on a commissioning
technicality or court order. DOE is working with industry and the NRC under
the new "Nuclear Power 2010" initiative in 2004 to prove out specific steps
of a new "combined Construction and Operating License (COL)" to address this
showstopper. Financial backing will also be needed, but the nuclear track
record in the U.S. is pretty good: out of 110 reactors built for commercial
power, only Shoreham (1989) was not licensed, a default exposure of less
than 1%.

Notably, accidents, terrorist attacks and safety were not seen as
deal-killers. In fact, last year, the Center for Strategic and International
Studies (CSIS) conducted an energy terrorism exercise dubbed "Silent
Vector." The exercise examined the vulnerability of refineries, large
LNG/LPG storage facilities, pipelines, petroleum terminals, nuclear power
plants, chemical plants and dams. At the conclusion of the exercise, CSIS
president John Hamre noted, "Nuclear power plants have become of great
concern to everybody. But they are probably our best defended targets."
(Power Engineering, Jan. 2003)

The Last Hurdles

Beyond the three showstoppers, the elevated capital cost of the first few
units and the time required to bring a unit on-line are the remaining
barriers to a domestic nuclear renaissance. Utilities are interested in
ordering the third or fifth unit; federal credit is needed to deal with
elevated costs and risks, including the drag on utility earnings during
construction and the commissioning risk mentioned above, to get the first
few reactors built.

Unfortunately, opponents of nuclear power deliberately muddled the cost
figures in Senate debate on the energy bill. The loan guarantees and power
purchase provisions proposed in the original energy bill (S.14) could in no
way approach the $16 billion figure put forward by the congressional
analysts (CRS, CBO), and claimed by Senators Wyden and Sununu as too costly.
Projects with a 50% default rate presumed by the Congressional Budget Office
(CBO) and nuclear opponents simply would not be put forward by either
industry or the federal agency. Based on "caution" and outdated references,
CBO rated the default outlook for such projects on par with default rates
found in Argentina!

Furthermore, experience by U.S. firms overseas, low interest rates, advances
in computer-aided engineering, and industry analysis shows that new reactors
could be built for $1800 to $1400 per kW depending on the model, size and
financing costs involved, not the $2300 purported by CBO. Fritz Gautschi,
past president of Alstom, argued in Power Engineering (March 2003) that
nuclear power could be competitive at busbar with capital costs near $1430
per kW if natural gas prices are $3.30/MMBtu. But, with substantially higher
demand, plus chronic gas transportation constraints, gas prices in the U.S.
now have moved to a $4 to $6 range with higher spikes. Hence, the first few
reactors with elevated capital costs in a range of $1600-$1750/kW could be
near competitive with some federal credit assistance, particularly in
regions where long-term contracts are more the norm.

Federal credit would also help offset the "earnings dilution" utilities
could suffer by laying out large amounts of equity investment with no return
on it for several years during construction and commissioning. This explains
why gas-fired units comprise 95% of new capacity ordered since the onset of
competitive electricity rules by FERC in 1998: gas turbines are cheap and
can be brought on-line in 12-24 months. But, because fuel comprises over 60%
of the electric price from gas-fired units (vs. just 10% with nuclear
generation), ratepayers may then suffer rising or volatile prices, and the
national energy portfolio becomes unbalanced over time.

Many government agencies, such as the Department of Agriculture and the
Department of Transportation, offer financial assistance under the Federal
Credit Reform Act (1990) for rural utility projects, transportation
infrastructure, and water resource development. Advocates of renewables
understand the importance of federal support for first units to help bring
higher capital costs down to competitive levels. Federal credit agreements
are not "bailouts," nor are they outright subsidies from the Treasury as
ladled out for solar, wind and ethanol. Such agreements (versus
unaccountable grants or tax credits), combined with private funding,
engineering and operating progress since reactors were last built,
dramatically reduce the likelihood of default. Hence, a cautious 10%-20%
default rate on $1 billion in federal loan assistance would trigger
$100-$200 million in possible budget exposure, not $16 billion! And the
first reactors would be built in stages, not all at once.

A bare majority of senators saw through the distorted numbers, defeating a
proposed amendment to eliminate the nuclear provisions in a close 48-50 vote
on June 10, ably led by Senator Pete Domenici. That vote is a matter of
Senate record, not to be cast aside going into the energy debate this fall.

Fact is the other energy sources are already subsidized, some of them
heavily. According to analysts, domestic oil exploration receives
multi-layered depletion allowances and other tax breaks, totaling over $2
billion a year. The government has invested billions in solar research since
the 1970s to help bring the cost of solar equipment down. Because the
systems are so small, however, solar still costs more than $10,000/kW
(compared to $600/kW for gas-fired turbines). Our nation's hydropower dams
(>80,000 MW) were built by the federal government; and most are still
operated by the federal Power Marketing Administrations. Wind power received
for several years and still garners a substantial direct subsidy: a
1.8-cent/kWh production tax credit. In this same Senate energy bill (S.14),
Democrat farm senators, notably Harkin and Daschle, are making sure ethanol
is scheduled for a massive 50 cent per gallon direct subsidy, with a target
of 5 billion gallons a year in production before 2010. More than 80% of the
nation's ethanol will be grown in just a handful of Midwestern states. New
coal plants are slated in the House version of the energy bill for a 10%
investment tax credit, and benefit from a ten-year $2 billion federal "Clean
Coal" program already underway.

Taken in perspective, financial assistance provisions contemplated for the
energy bill now before Congress amount to a small public investment,
especially given the huge emissions benefits and reliable power at stable
prices it offers. Nuclear power deserves to be in the energy bill with
federal support to preserve its vital position as an anchor of high quality
performance in our electricity landscape.

Author -

Andrew Paterson, a Principal with Environmental Business International,
served as the lead market analyst on Business Case for Nuclear Power. He has
recently been asked to join the Deloitte Global Energy & Resources practice.

Power Engineering October, 2003